Jump to content
ATX Community

Maybe over my pay grade - sale of an S Corp mid year - how to prepare the K-1s


Recommended Posts

Posted

100% owner of an LLC taxed as an S corp is contemplating a sale to 2 employees.   Transaction to take place in July.   Structured as a stock sale.   New owners will continue operations as if nothing changed (but a lot will change).  At this point, the LLC is break even, but they are coming into their most profitable months of the year.   Anticipate profits for the year.   

I understand that the company can either "close the books" or they can allocate the income and expense based on percentage of time shares were owned.   Right now, it appears they don't want to close the books.

Assuming the transaction is structured as stated (which is not certain at this point), how do you make ATX allocate the K-1 items for the year in ATX?

I have a zillion more questions for the potential client...

Tom
Longview, TX

Posted

The ownership changes section of the K1 works fine. It's been awhile since I've had one, but I don't remember having any trouble getting it right.

I'm surprised the seller doesn't want to close the books. If the new owners increase income substantially, the seller will be paying tax on income he'll never receive. He'll get an offsetting basis increase on his capital gain or loss on the stock sale, in this example.

  • Like 3
Posted
5 minutes ago, Abby Normal said:

The ownership changes section of the K1 works fine. It's been awhile since I've had one, but I don't remember having any trouble getting it right.

I'm surprised the seller doesn't want to close the books. If the new owners increase income substantially, the seller will be paying tax on income he'll never receive. He'll get an offsetting basis increase on his capital gain or loss on the stock sale, in this example.

I totally agree,  if the current owner is your client, wouldn't you have to advise him to close the books on the date of sale.

In fact, if the seller was my client I would write a CYA letter.

The other big issue is "conflict of interest."  There is no way you can advise both the seller and the buyers.

The differences between an "asset sale" and a "stock" sale how the seller and the buyers will be effected could be quite dramatic!

  • Like 2
Posted

My potential client is the buyer.   I know the seller and I would never represent that individual.  He has his own team of lawyers and accountants but I think he only consulted with the lawyers.

I understand there may be "phantom income" for the seller with no recourse if the transaction goes through as it has been explained to me.  My potential client has the opportunity to push 50-60% of their income onto the seller's K-1 and I don't think anyone but me knows that this is the outcome they will get from the transaction they propose.

I have read about this, but never done a return that has this type of a transaction.   

Tom
Longview, TX

Posted

Depends.   The company does not have a lot of assets and the ones it has do not have a lot of depreciation on them.   I don't know if they can make a §338 election or not, and I really need to read up on that tonight.   

Like I said, this may be one I can't do...

Tom
Longview, TX

Posted

An entity with little or no depreciating and physical assets may often change hands without closing things out. In our case, shares were transferred on a mid year date, so there was income "recorded" through that date, then for the remainder of the year. Only affected those particular shares. I do not prepare the returns, just the accounting, but that is how I remember it.

Ending things and starting fresh can be a bunch of not needed work when the parties can agree on a smooth transfer.

Posted
5 hours ago, BulldogTom said:

 Right now, it appears they don't want to close the books.

In order to elect an interim closing of the books under IRC 1377(a)(2) all affected shareholders must agree.  Otherwise the pro rata method is used.

  • Like 1
Posted
3 hours ago, BulldogTom said:

 I don't know if they can make a §338 election

I believe buyers would have to form a corp to buy the existing corp and elect sect 388.

 

3 hours ago, BulldogTom said:

I don't think anyone but me knows that this is the outcome they will get from the transaction they propose.

It is up to the seller's advisors to consult him on this matter.

3 hours ago, BulldogTom said:

He has his own team of lawyers and accountants

 

Posted

Do the buyers need to maintain a good working relationship with the seller because if the seller ends up angry as a result of a % allocation,

it might cause problems for the buyers.

Posted

The allocation method should be in the stock purchase agreement.

6 hours ago, BulldogTom said:

team of lawyers and accountants

His team should insist on a 1377(a)(2)election as part of the agreement, otherwise he is at the mercy of the buyers come tax time.  But that is not a concern of yours.

  • Like 1
Posted

Just did some reading on §338 elections.   Very interesting.   Nice of congress to let you do a stock sale and record it like an asset sale.   Made sense why it is allowed when they gave some examples.

If I understand it correctly, the acquired S Corp becomes a Qsub of the purchasing S Corp?  And the purchasing entity cannot be an LLC taxed as a corp, it must be a corp?

Tom
Longview, TX

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Restore formatting

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...